They’re, Like, So Last Year: ARMs Fall Out of Fashion

Consumers shied away from adjustable-rate mortgages as 2007 wore on, according to a report released Tuesday by Freddie Mac that said that the interest-rate savings relative to fixed-rate loans has shrunk.

“Disruptions in the capital markets beginning in August and an increase in delinquencies on ARM product has led to a sharp decline in interest-rate discounting and a tightening of credit underwriting on ARMs in recent months,” said Frank Nothaft, Freddie Mac vice president and chief economist.

“A year ago, the initial-rate discount on the popular 3/1 and 5/1 hybrid products was about 1.8 percentage points. In our latest survey, the rate discount had virtually disappeared on these products.”

The survey, based on data collected December 17 to December 21, found that starting rates for ARMs were close to or above rates a year earlier, even though the Federal Reserve had lowered its federal funds target from 5.25 percent to 4.25 percent over the time since Freddie Mac’s previous survey. In contrast, fully-indexed rates had fallen to their lowest levels in three years, resulting in an erosion in the initial-rate discount that had been prevalent in the market during 2005 and 2006.

ARMs accounted for 17 percent of loan applications in October 2007, Freddie Mac said, the lowest since June 2003 when fixed-rate loans were near a 45-year low in interest rates and refinance activity was near a peak.

The initial rate on jumbo 1-year ARMs was about one-quarter of a percentage point higher than on conforming 1-year adjustables, the largest gap in seven years, according to Freddie Mac’s surveys.

For more information, visit http://www.freddiemac.com.